Want to start a day care? Help is on the way

NEW YORK
— Five months ago, Kevin Robinson tried to borrow $100,000 from a New York bank to open a day-care center in central Harlem.

So far, Mr. Robinson hasn't gotten his loan despite the fact he has 17 years of experience in the business. "They wanted to know about my house, my car, my jewels - you would think they would be interested in our management ability," says Robinson, the managing director of two day-care centers.

Robinson's problem is not unique. Banks are reluctant to lend money to day-care centers because the profit margins are low and banks perceive the loans as risky. This is particularly true in low-income neighborhoods where the tuition - much of it state-subsidized - is insufficient to cover a large loan.

"As far as a bank is concerned, child care has three strikes against it - it's not seen as a legitimate business, it has a limited access to cash, and minority women run most of them," says Donna Thornton, president of the National Association of Child Care Professionals in Christiansburg, Va.

That's where some proposed new federal legislation may come in. Legislation pending in a House subcommittee creates a new government entity called the Children's Development Commission ("Kiddie Mac"), which will offer guaranty insurance, provide miniloans for start-up costs and rent, and provide affordable fire and liability insurance for day-care centers.

Although Kiddie Mac sounds like other programs such as Fannie Mae (Federal National Mortgage Corp.), it differs in that it won't be a separate government-sponsored agency but will fall under the aegis of the Department of Housing and Urban Development (HUD), which will guarantee day-care loans.

"Kiddie Mac won't take care of all the challenges, but it takes care of ... the building blocks of child care," says the author of the legislation, Rep. Carolyn Maloney (D) of New York. Ms. Maloney's approach interests some Republicans, including Rep. Richard Baker (R) of Louisiana, the chairman of the House Capital Markets, Securities and Government Sponsored Enterprises Subcommittee.

Last September, Congress passed a law, sponsored by Rep. Connie Morella (R) of Maryland, to subsidize day care for federal workers. Ms. Morella is starting the process of trying to make the current day-care tax credit refundable for low- and moderate-income families, who usually can't use tax credits.

The Democrats, too, have child-care proposals, including increasing the tax credit for working families, adding a tax credit for stay-at-home parents with children younger than 4 and a plan for after-school care for up to 1 million children per year.

The congressional interest in day care comes at a time when the day-care system is under stress. There is a much greater demand than available space for day care. For example, in New York, state Comptroller H. Carl McCall estimates there are 55,000 children waiting for child-care placements in New York City. In California, the Children's Defense Fund estimates there are 200,000 low-income families on a waiting list for child-care assistance.

"Currently, no state can afford to serve all families eligible under federal guidelines," says the CDF, which notes that one recent four-state study found 40 percent of the day-care space is of such poor quality it jeopardizes children's health, safety, and development.

And demand is rising as more women enter the workforce and many states require women to work for their welfare benefits. In New York, Mr. McCall estimates the demand for child care could double as a result of welfare reform.

Despite the demographics, Robinson, the entrepreneur, was shocked when the banker asked him to prove there was a demand for day care in central Harlem. He went to the local community board, which said there were 1,200 children on the waiting list for day care in this area. He was planning on building a facility to take care of 120 kids. "I'd like to take care of more of them," he says.

However, new day-care centers are not keeping up with the rising demand, in part because of the difficulty of finding financing.

"Despite the acknowledged need for child-care facilities in low-income neighborhoods, financing of such facilities often presents insurmountable challenges to banks whose obligation lies in maintaining their institutions' safety and soundness," says Michael Smith, president of the New York Bankers Association.

Kiddie Mac attempts to remedy some of the bankers' reluctance to lend money for new day-care facilities. Banks could purchase guaranty insurance through HUD. Mr. Smith says this would help with some loans. But, he adds, "In certain lower-income, higher-risk scenarios, the availability of guaranty insurance could not rehabilitate unsound loans" since the day-care centers can't raise prices or cut expenses.

To further entice bankers, Maloney and Mr. Baker are considering making the loans count toward a bank's Community Reinvestment Act (CRA) requirements. Under the federal CRA law, banks are required to invest in their local communities and CRA investments are considered by federal authorities when considering whether to allow a merger. Smith says CRA eligibility "can only be helpful but it's not the panacea."

Baker says it's possible that Congress will approve a pilot program in New York and Baton Rouge, La. Eventually, Maloney hopes to get $20 million from Congress to make it into a national program.